The government's decision to limit tax relief on buy-to-let will force 440,000 of Britain's landlords into a higher income tax bracket, research claims.

Landlords may have to hike rents or sell to shore up their finances, as while currently they can offset their mortgage interest against income tax, from April 2017 they will see this benefit cut and eventually replaced by a 20 per cent tax credit.

The switch will also fundamentally change the way that landlords deal with their finances: instead of paying tax on just their profit, after 2020 they will have to pay tax on their rental revenue.

The addition of this rental revenue to their normal income before their tax rate is calculated will push hundreds of thousands of people into a higher tax bracket.

Two thirds of landlords have said they will have to put up rents to cope with the costs

The forthcoming buy-to-let tax changes have led the National Landlord's Association to claim that 440,000 basic rate tax-paying landlords will find themselves in the higher rate tax bracket in future.

Mortgage broker London and Country gives an example of a basic rate taxpayer with a property let out for £15,000 per year on an interest-only mortgage costing £10,800 per year.

Under the current system, their rental income is judged to be £4,200 because they are able to deduct that mortgage interest before declaring their taxable income.

From April 2017 the same landlord will be judged to have income from the property of £15,000.

If that buy-to-let landlord had a job with a salary of £35,000, under the current system they would remain a basic rate taxpayer with total income of £39,200, but under the new system they would be a higher rate taxpayer judged to have total income of £50,000.

What next for mortgage rates: Lenders continue to tinker...

Buy-to-let interest booms 30%: Brexit, stamp duty and the...

Rent hikes loom as more than a million landlords plan to...

Nearly half of Britons believe property is the most...

Need to review your buy-to-let portfolio? Get free advice from the This is Money mortgage service

As a direct result of the changes, 22 per cent of landlords questioned by the National Landlord Association, said they would be personally pushed into a higher tax bracket.

A further 15 per cent of landlords had failed to work out what the financial impact of these changes would be on their own finances.

The amount by which landlords will be affected will depend on their personal circumstances, including whether or not they generate income from any other sources.

Richard Lambert, chief executive at the NLA, said: 'When the Government announced these changes last year, it claimed they would only hit a small proportion of higher-rate tax payers. We now know that is complete tosh.'

Lambert said he hoped the Government would consider applying the rules only to new buy-to-let loans, approved after April 2017.

'Unless this happens, landlords will face an impossible decision of whether to increase rents and cause misery for their tenants, or to sell-up, and force their tenants to find a new home,' he said.

Chancellor of the Exchequer Phillip Hammond has agreed the National Landlord Association can meet the Treasury to discuss their concerns

In theory, basic rate taxpaying landlord will not find their tax bills rise thanks to the new 20 per cent tax credit against mortgage interest, however, those who pay higher rate tax will see returns eaten into as they lose 40 per cent tax relief.

Separate research from the Residential Landlords Association, published earlier this month, struck a similar chord to the NLA. Around two-thirds of its members said they are set to put up rents to cope with the cost of the changes.

A third said they'll hike annual rents by around £300 next year. A further third said the rise would be closed to £600 — and 7 per cent plan to charge an extra £1,200.

Earlier this month a legal challenge to the impending tax changes, led by Cherie Blair, CBE and QC of Omnia Strategy LLP, failed.

Interest deductibility for residential property landlords was restricted to 75 per cent in 2009 as part of the measures introduced to rescue the public finances.

In his 2017 Budget Noonan said: 'It is an appropriate time to revisit this measure in the context of the housing crisis.

'In light of the incentive I introduced last year to support landlords who let their property to social housing tenants for a minimum period of three years, I am going to restore full interest deductibility for other landlords on a phased basis.'

The relief will rise from 75 per cent to 80 per cent in 2017 and thereafter will rise in increments of 5 per cent until fully restored to 100 per cent.

Now landlords are scrabbling to persuade Government officials that the changes will be bad for tenants in the hope they are reversed before April next year.

The NLA has met housing and planning minister Gavin Barwell and has further plans to meet financial secretary to the Treasury, Jane Ellison, to argue landlords' case after Chancellor of the Exchequer Phillip Hammond agreed to hear what they had to say.

Remortgage now, warn brokers

Mortgage brokers meanwhile said landlords must prepare for the changes to go ahead.

David Whittaker, of buy-to-let specialist Mortgages for Business, said: 'We recognise the NLA's figures and anticipate that the impact in future years will be greater again.

'This is why we think that landlords who choose to continue owning property personally should consider locking into the low five-year fixed rates currently available to reduce costs wherever possible.

“Clearly landlords must seek tax advice but it is our belief that going forward, most will be better off making purchases via limited companies to mitigate both the changing tax environment and the new underwriting guidelines issued by the Prudential Regulation Authority.'Multiple headwinds are piling pressure on landlords

Many landlords seem not to realise that over the next few years they will face a considerable hit in the pocket

The PRA guidelines, published in late September, require lenders to impose tougher rental income ratios on landlords who take a buy-to-let mortgage.

Rather than needing rental income to equal 125 per cent of their mortgage payments, landlords will need this ratio to be a minimum of 145 per cent to meet most lenders' new criteria.These changes are not the only headwinds faced by landlords.

Until April this year landlords could deduct 10 per cent of their rental income when calculating taxable profit to allow for general 'wear and tear'.

Now landlords can only deduct the actual costs incurred by replacing furnishings in the tax year.And anyone purchasing a buy-to-let property or second home after 1 April this year has has to pay a 3 per cent surcharge over the standard rate of stamp duty adding tens of thousands of pounds to the cost of purchase.

Andrew Montlake, of mortgage broker Coreco, said: 'Despite the publicity there has been over the crackdown on buy-to-let landlords it still seems that too many landlords have their heads in the sand where these tax changes are concerned.

'Many seem not to realise that over the next few years they will face a considerable hit in the pocket. We would urge landlords to get professional tax advice now to understand the full impact of these changes.' > Read our guide to tax on buy-to-let

HOW WILL THE REMOVAL OF TAX RELIEF AFFECT YOU?

Region

Percentage of landlords moving from basic to higher rate tax

East England

30%

East Midlands

22%

London (central)

31%

London (outer)

24%

North East

24%

North West

19%

Scotland

13%

South East

25%

South West

23%

Wales

23%

West Midlands

28%

Yorkshire & Humber

24%

Source: National Landlords Association

CUT YOUR BUY-TO-LET COSTS WITH A BETTER MORTGAGE

If you are considering investing in property - or improving returns on a buy-to-let you already own - then taking advantage of record low mortgage rates could pay off.

Buy-to-let mortgages are slightly more expensive than residential loans and have different lending criteria, but rates are still near all-time lows.

Getting a better mortgage will help save money on a purchase, or could cut costs substantially for existing landlords.

Check the best buy-to-let mortgage rates for you and how much they will cost using our mortgage finder service and best buy tables.

This is powered by This is Money's carefully chosen partner London & Country, which can also offer fee-free advice to potential borrowers.

For more help, read This is Money's Ten tips for buy-to-let - the essential guide to successful property investing.